The National Company Law Appellate Tribunal (NCLAT) on Monday dismissed the petitions filed by erstwhile MCX promoter Jignesh Shah and others challenging an NCLT order that allowed insolvency proceedings against investment firm La-Fin Financial Services. Jignesh Shah along with Pushpa Shah and others had appealed against the order of Mumbai bench of the National Company Law Tribunal (NCLT), which on August 30, 2018, allowed the insolvency proceedings against Shah’s investment firm La-Fin Financial Services over a plea filed by IL&FS Financial Services.

Rejecting the petitions, a two-member NCLAT bench headed by Justice S J Mukhopadhaya held that IL&FS Financial Services “is the ‘Financial Creditor’ and there is a debt and default, the application under Section 7 is to be admitted.” “We find no merit in these appeals, we accordingly dismiss both the appeals,” the appellate tribunal said. IL&FS Financial Services had moved the insolvency plea before the NCLT on May 25, 2017, in respect of a debt of Rs 97.79 crore and default of payment of a financial debt of Rs 266.39 crore.

Challenging the NCLT order before the appellate tribunal, Shah had contended that there was no financial debt and there was no relationship of debtor and creditors between La-Fin Financial Services and IL&FS Financial Services. According to it, there was no disbursement of money to IL&FS Financial Services by La-Fin Financial and in all principal documents are titled as share purchase agreement (SPA) and letter of undertaking (LoU).

Moreover, in SPA, parties are referred as purchasers and sellers and the money paid by La-Fin Financial to Multi Commodity Exchange of India (MCX) is referred to as purchase consideration. However, the NCLAT rejected it observing that on a careful reading of the agreements such as SPA and LoU, it found that IL&FS Financial Services has disbursed the amount and La-Fin Financial has raised the amount with an object of having economic gain or commercial effect of borrowing.

“The clauses of SPA if read along with the LoU, we find that the terms of transaction involved not only the purchase of shares but it shows the date by which the amount of transaction was to be repaid by the Corporate Debtor which had fallen due on 19th August, 2012,” said NCLAT. It also said that there was an element of time value of money, particularly, when one of the conditions related to ‘internal rate of return of 15 per cent’ on the transaction, therefore, the time value of money having already shown.

“We hold that the amount if disbursed by IL&FS Financial Services comes within the meaning of financial debt, therefore, IL&FS Financial Services has been rightly claimed to be a Financial Creditor and filed Form-1 under Section 7 of the IBC Code,” it added.

The issue dates back to August, 2009, when IL&FS Financial Services was holding 5 per cent equity shares of MCX and wanted to exit from it. As per the agreement between IL&FS Financial Services and MCX, it was decided that former’s investment in latter would be transferred to another investor viz IFCI.

Part of the proceeds realised therefrom would be used by IL&FS Financial Services to purchase from MCX 4.4 crore equity shares in MCX-SX representing 2.46 per cent of its equity share capital. And La-Fin Financial Services, which is a corporate debtor here, as a condition to the IL&FS Financial Services purchasing the aforesaid shares of ‘MCX-SX’, would offer to buy or cause to be bought from the financial creditor at an agreed price within a pre-determined period.

An SPA was executed between IL&FS Financial Services, MCX and MCX-SX on August 20, 2009. Following this, IL&FS Financial purchased 4.42 crore equity shares of MCX-SX. Side by side an LoU was executed on the same day by La-Fin Financial Services to purchase IL&FS Financial Services share in MCX-SX between a period of one year and three years.

On August 20, 2009 IL&FS Financial Services purchased the share of MCX at Rs 36 per share for total consideration of Rs 159.12 crore. However, later a Scheme of Reduction’ of the Share Capital of MCX-SX was passed and its obligations under the LoU became infructuous. Following, IL&FS Financial Services issued a Statuary Demand Notice on November, 2015 asking La-Fin Financial to pay Rs 232.50 crore along with 15 per cent interest.

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